The purpose of this study is to investigate an incentive for the merger of local municipalities (cities, town and village) in view of the intergovernmental subsidy policy. The central issue in our study is the relation between population and the per capita subsidy. The empirical results are, first, when a town and village merges, the subsidy in total decreases. Second, when a town and a village combine to form a city, the subsidy drastically decreases. Third, the estimated subsidy function decreases, as the population grows, and then gradually increases. Over 85% of the cities are positioned around the decreasing part of the graph.